In our previous article, we discussed the benefits of GST. However, like everything else, all is not smooth sailing for GST and there are some obvious disadvantages of GST for businesses and end consumers which we will discuss in detail here.
Higher Tax Burden for Manufacturing SMEs
Small businesses in the manufacturing sector will bear most of the brunt of GST implementation. Under the existing excise laws, only manufacturing business with a turnover more than Rs. 1.50 crores have to pay excise duty. However, under GST the turnover limit has been reduced to Rs. 20 lakh thus increasing the tax burden for many manufacturing SMEs.
Increase in Operating Costs
Most small businesses do not employ professionals and prefer to pay taxes and file returns on their own to save costs. For GST though, as it is a completely new tax system, they will require professional assistance. While this will benefit the professionals, the small businesses will have to bear the additional costs of hiring experts.
Also, businesses will need to train their employees in GST compliance increasing their overhead expenses.
Change in Business Software
Most businesses use accounting software or ERPs for filing tax returns which have excise, VAT, and service tax already incorporated in them. The change to GST will require them to change their ERPs, too, leading to increased costs of purchasing new software and training employees.
GST Will be Implemented During the Middle of the Year
The tentative GST implementation date is 1st July 2017. So, for the fiscal yea, 2017-18 business will follow the old tax structure for the first 3 months, and GST for the rest of the time. It is impossible to cross over from one tax structure to the other in just a day, and hence businesses will end up running both tax systems in parallel, resulting in more confusion and compliance issues.
Increase in Taxes will Increase Prices
Currently, some sectors like the textile industry are exempted from taxes or pay low tax. GST has only 4 proposed tax rates of 5%,12%,18%, 28%. Thus, for many sectors the tax burden will increase which in turn will increase the price of the final goods.
Petroleum Products Are Not Part of GST Yet
Petroleum products are being kept outside the scope of GST as of now. States will levy their own taxes on this sector. Tax credit for inputs will therefore not be available to related industries like the plastic industry which are heavily dependent on petroleum products. Petrol and diesel are required to run factory machinery and unavailability of input tax credit on petroleum products will most probably push up the final price of all manufactured goods.
Recently the Finance Minister Arun Jaitley said that GST will apply on petroleum only after all the states, through the GST Council, are agreed on it. So, an inclusion of petrol in GST is expected but there is no deadline on the horizon yet.
Registration in Multiple States
GST requires businesses to register in all the states they are operating in. This will increase the burden of compliances.
Problems Faced by E-commerce
Nowadays, many SMEs operate through their own online shopping websites or through third party websites to sell to different parts of India. Under GST, they will be required to register for all the states. Not only that, they will not be eligible for composition scheme and will be required to pay taxes like any large organisation. E-commerce facilitators are now required to collect TCS under GST which will lead to increased complications and compliances.
Composition Scheme is Not Available for Many Businesses
Composition scheme is available for only businesses selling goods. It is not available to service providers or for online sellers. This sets SMEs at par with largeorganisationss in an unfair move.
No Anti-Inflationary Measures
Every country that follows GST experienced a hike in inflation when they first introduced it. They countered the inflation by keeping tabs on prices and initiating anti-profiteering measures at the retail level to protect consumers from price swindling.
While there have been similar discussions in the GST council, India still does not have concrete anti-inflationary measures to curb the inflation that is an inevitable outcome of GST.
Conclusion
Change is definitely never easy. It is important to take a leaf from global economies that implemented GST and overcame the teething troubles to experience the advantages of having a unified tax system, easy input credits, and reduced compliances.
Once GST is implemented, most of the current challenges of this move will be a story of the past. India will become a single market where goods can move freely and there will lesser compliances to deal with for businesses.
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